Tuesday, January 6, 2009

Reasons to buy an apartment in Manhattan in 2009

Every marketplace offers opportunities for someone. People have been taking a wait and see attitude with their investing and spending since September, so it will come as no surprise that with it, New York real estate has experienced a slowdown in the last quarter of 2008 too. It will contribute to a very different marketplace than we've seen in several years.

Whether it is the right time to buy or sell a home is not solely based on the temperature of the market. It is more likely motivated by an individual's circumstances and should be considered in terms of the impact of the move in five years, not five months from now real estate is the textbook example of illiquid, long term value. Manhattan apartments are still trading, at the right price, and with the right marketing. Chances are greater that it it will be at a slightly lower price than it might have been at the beginning of 2008. For most sellers it's a paper loss and they will still realize a very healthy margin of profit from their homes after experiencing the sharpest rise of values in history. It may be counter intuitive to buy in uncertain times, but if 2009 is the year where the market catches its breath, it is also where buyers seeking value are able to get what they seek. Here are five reasons why:

Mortgage interest rates have dropped dramatically

In December, Fed Charman Ben Bernake announced that they would purchase mortgage bonds and possibly Treasury bonds in an effort to stabilize the markets. The effect was that mortgage rates fell to their lowest levels in 40 years. According to Debra Shultz at Manhattan Mortgage, rates today for a 30 year fixed conforming mortgage (up to $417K) is 5.25%; and the rate for a 30 year "high balance" mortgage (up to $625K) at 5.5%. Jumbo 30 year fixed mortgages (over $625K) are at 5.875%. These rates are just about a full point lower than they were a year ago, making properties more affordable. You can use a mortgage calculator like this one to help estimate the effect on your purchase.

There is talk of rates dropping further. Chances are that the incoming Obama administration will do what they can to stimulate the economy and the housing market, by helping to keep mortgages low. It will help people to refinance existing loans, making their homes more affordable, and increasing their disposable income. It should stimulate home buying as well. Exactly how they might do that remains to be seen.

There is finally a good selection of apartments to choose from

Manhattan has traditionally had highly restricted housing supply. A few years ago the most common complaint was that very little was available in any particular neighborhood/size/price, and what was available was snatched up quickly; often with multiple bids. That's changed and buyers are in a much better position to find the apartment and features that they want. They feel less pressure and have more control in the deals. One caveat, the good stuff, that's well priced, will still go pretty quickly. So look and make offers, but chances are that if you perceive value, others will too.

Coops and resale properties are where the value is

I'm a resale agent and that is where the value will be in this market. Sellers that have built equity over time are in the best position to strike a deal. If relocating to the suburbs, they will find a market that has likely corrected more than Manhattan has. If staying in town, they will be reinvested in the same marketplace in which they are selling. Compared with sponsor sales, resale properties in condos that were developed just a few years ago will often trade for a bit less. They may be gently used, but offer many of the same features and style as their more recently developed cousins.

New developments may be willing to offer incentives to buyers

Developers have been creating top quality housing in Manhattan for several years, but the credit crisis, which began for them in October of 2007, has effectively all but halted that building boom. The pipeline has dried up, and when the new product has been absorbed, there will be little new stuff following for while. I've heard experts put the total available housing stock in Manhattan, including resales, at about 9.5 months of inventory. That would be as opposed to two or three years worth in more severely correcting areas of the country. Buyers have a short lived opportunity now to negotiate on their choice of new developments. Sponsors have been driving a pretty hard bargain in the recent past. They have been able to not only charge premium pricing for their product, but also have asked customers to pick up sponsor closing costs and their transfer taxes traditionally seller's expenses. Competition for customers has gotten stiffer, as they not only compete with other new developments, but with recently developed units coming onto the resale market too. Competition in this way is good for buyers. Some sponsors are advertising that they will now pick up closing costs. Other incentives may be negotiated too at some developments, whether explicitly stated or not. Everyone wants to make a deal.

Strong buyers those with all-cash or substantial down payments, have an advantage

The quality of buyers is more important than ever to a seller. In a market where mortgage contingencies have become common again, credit underwriting requirements are stricter, and loan to value ratios are being scrutinized more carefully, those with substantial down payments, or who do not require financing, will find they have greater leverage in negotiating.

reader comments:

your assuming that incomes come back within the next two years. coop boards should have required 10yrs worth of mortgage payments in the bank, not 2yrs. let's see what happens to inventory in as we move into 2010.

Funny, I didn't write that assumption in this post. Nor do I claim to have a crystal ball on our economic future. But I can tell you that during the worst economic and housing downturn the nation has seen in recent memory, Manhattan real estate resale prices (not counting new construction) at the end of last quarter were down about 6%. The beginning of a drop? Yes. Outperforming housing elsewhere as well as stocks which saw a 30% to 40% drop in the same period? Yes. Is the opportunity cost (rent) of not buying, let's say a nice one bedroom, somewhere about $2800 to $3200 per month in Manhattan? Yes. Is that about $36,000(+-) per year that is a guaranteed loss? Yes. So all this posts points out is that the market has shifted into one where buyers have distinct advantages in negotiability, choice and low mortgage rates. I've no doubt that prices will continue to adjust downward for a little while. That is actually a market environment in which brokers can guide customers to the right apartments, and negotiate good deals for them. That's why they call it a buyer's market.

You are comparing apples and oranges ...
1) A 30% to 40% decline in stocks assumes no leverage. If prices are down 6% as you say, then people buying at peak with 20% down have lost 30% of capital (please note that roughly a 20% decline in apt prices = 100% loss of capital using your mark to market analysis).
2) The comparison with rents is bogus and you can only look at historical averages (we are approx 35% above those levels).
3) Analysis should also include inventory expectations -- 20 to 30k new development units coming to market in 2010 and 2011 (I would think this will add significant pressure to prices).
... buy if you see something priced at 20 cents on the dollar,but otherwise, don't waist time paying down negative equity!!!

The point of the post is that conditions do exist now which are allowing buyers to negotiate well. There are deals to be had, but if you want to pay 20 cents on the dollar meaning to pay $200K for what today is properly valued at $1M, then you'll be waiting a long, long time. You're commenting on your own analysis, time frames, and story, rather than on my post. So, if you want to consider only the worst case scenario of someone who bought at the peak a year or two ago at 80% financing, and wants to sell now, after only holding the property for 12 months; then you're right. They lose. But that represents a sliver of the marketplace. Many homeowners have substantial equity built in their homes either by appreciation, or more substantial down payments, and are in a much better position than the one you describe. The post talks about the opportunities for buyers. Sellers will have various levels of tolerance for pain.

Comparing two methods of obtaining housing is not bogus, you simply choose not to compare them. One either buys it or rents it. One cannot reasonably consider not using one of those methods unless they are moving back in with their parents. In one scenario you pay down your own debt, in the other, you pay down your landlord's debt.

Your new development figures are way off, they reflect at best, the total number of building permits applied for with the DOB in 2007 to 2008 in all five boroughs not the amount of Manhattan housing inventory produced. There is little doubt that given the current market conditions many of those projects will be canceled, delayed, or reconfigured. The NY Attorney General's office showed applications for condo and co-op approvals to begin sales in 2007 and 2008, in Manhattan, were only 5,141 and 5,209 units respectively each year according to The Real Deal Data Book. That is the actual pace of the Manhattan pipeline, and the spigot is getting tightened by the market forces. Development is grinding to a halt. Inventory is increasing, but it is due to uncertainty in the economy causing a lack of demand and absorption, not primarily because of unrestrained development.

Re rent/buy: You need to provide offset for taxes and coop/condo fees but these things are very hard to scale. Think of it this way, if fees decline the building in theory loses value which impacts resale value of units (you are paying to maintain your current value). Many other factors twist/impact this analysis because of the lock-in on the mortgage -- the rent/buy relationship is complicated and comparing current to long term trends (15 to 30yr averages) is the only way to look at the price cycle (history shows a very clear cycle). That said, you will know when we are there because supply will = demand.

Also, please note that 20 cents on the dollar is term used when something requires liquidation ... you will indeed see extreme cases of liquidation as people start to feel the pain of paying a 7-15k monthly mortgage from bonus pool funds. The warning signs are there if you look ... the market is pricing jumbo mortgages like alt-a mortgages (in today's world NY is truly leveraged to the US economy).

Thanks TA, this has been an interesting discussion; and I don't disagree that New York's future is tied to that of the nation. I do think that the nation and NYC will recover too. I see properties which are used as primary residences as operating a bit differently from pure investment plays. We are all looking closely at the market and the economy. Things may get worse before they get better by all accounts. On buyer side negotiations, that is a factor in the buyer's favor. In my opinion, the best opportunities are often somewhat counter intuitive. Could the glass be half full?

What you may also want to consider is that the conversation about Manhattan real estate on the Web is so passionate, very much because people are looking so carefully, waiting for the right moment to jump in; but it won't show up in any analysis. The demand is lurking.

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